We tend to think of debt as a monolith. Headlines scream at us about how much of it Americans carry, we know that people struggle to make their payments- but what almost no one is saying is that there are different kinds of debt.
‘Debt’ is not just a catch-all term. We use it that way, but there are many types of it. And many types can mean many things for your money. Today, let’s talk about two of the most common types of debt: revolving and fixed payment. What are the differences? Is either one good debt?
There are many more types of debt, but these two are probably the most common. Let’s break each one down quickly:
Revolving debt is linked with credit that refreshes itself as you pay balances off. Think credit cards: as you pay off your bill each month your credit limit is restored and you have access to all that credit all over again. Interest rates with this type of debt can fluctuate over time.
Fixed Term Debt
Fixed term debt is linked with credit that disappears as you pay it off. Meaning things like student loan debt of mortgages: as you may payments you wipe out your credit entirely. Interest rates with this are fixed and there is usually a set amount of time you have to pay your debt back.
Good VS Bad Debt
Is there good and bad debt? That’s the eternal debate. Some people believe that things like student loans or mortgages is good debt. It allows you access to things that you otherwise would never experience, and in the long run, things that have a high return on your investment. Going to college will hopefully land you a high paying job, and mortgages allow people to buy homes.
Credit card debt, or personal loans with high interest rates, are usually seen as bad debt. It’s debt that you can keep occurring, thanks to that revolving credit. It’s also usually spent on non-essentials; clothes, food, travel. Plus, there’s no real return on those things. They don’t make you richer.
In large part, it’s all about how you use your credit lines and manage your money. Yes, there are predatory lenders who will gut you with interest rates, and there are no guarantees that your fancy degree will land you a high paying job. Lots of things about our system are a gamble. But you can control your spending to a degree, and flex those self-control muscles to keep your credit is good shape.
These two types of debt are pretty common and pretty accessible. Who doesn’t recycle a credit card offer letter at least once a week? Students are bombarded with access to student loans both on-and-offline.
How to Deal With These Types of Debt
Firstly, never take out more credit than you actually need. Just because your eligible for $40,000 in student loans doesn’t mean you need to take out that much. Be careful about how much credit you apply for, and look for ways to supplement your credit, like an extra job or reducing spending.
Secondly, when it comes to revolving credit like credit cards, only use a small percent of your available credit. This helps your credit score and ensures your bill won’t get too high. Remember: just because you have a credit card with a $7,000 monthly limit doesn’t mean you need to spend that much!
Finally, always make on time payments. Even if it’s just the minimum each month! It’s more important to make regular on-time payments than to make huge payments. Regular payments also help your credit score, and they keep those debt collectors off your back.
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